Standing Committee A

[Mr. Edward O'Harain the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Clause 9

General betting duty: gaming machines
9.5 am

John Healey: I beg to move amendment No. 1, in page 10, line 4 [Vol. 1], leave out
‘, where VAT is charged in respect of the use'.
I welcome you back to the Chair, Mr. O’ Hara, and I welcome hon. Members from all parties back to the Committee. If you permit me a degree of indulgence, I propose to refer to the purpose of clause 9 in explaining amendment No. 1. It is rather difficult to do the latter without the former.

Edward O'Hara: As long as the Financial Secretary realises that, in the light of that, I may judge that we do not need a clause stand part debate.

John Healey: I would be grateful for your guidance on the clause stand part debate, Mr. O’ Hara, if and when you choose to give it.

Edward O'Hara: We will see how the debate on the amendment goes, and then we shall determine that.

John Healey: Thank you, Mr. O’ Hara. The clause amends the scope of the exclusions to general betting duty in existing excise law and it does so with retrospective effect from 6 December last year. It ensures that any bet made using a gaming machine, within the meaning of section 23 of the Value Added Tax Act 1994, is excluded from a charge to general betting duty where VAT is charged in respect of use.
If the clause were not amended, bets made on gaming machines would be excluded from general betting duty only if they were charged with VAT. This means that if the bookmaker providing the machine were trading below the VAT registration threshold, VAT would not be charged and the bookmaker would continue to have to account for the general betting duty on the gross take of the machine. That would put smaller businesses at a disadvantage because general betting duty is charged at 15 per cent., while the net rate of VAT is typically about 12 per cent., which was clearly not what we intended in our pre-Budget report announcement or the drafting of clause 9.
The amendment will ensure the removal of the charge to the general betting duty from all machines defined as gaming machines for VAT purposes, andit is designed to have retrospective effect from6 December 2005. As a consequence of the VAT changes we announced in the pre-Budget report, bookmakers’ fixed-odds betting terminals have become gaming machines for VAT purposes. As it is not the Government’s policy to charge both VAT and general betting duty on the same transactions, we announced in the pre-Budget report that general betting duty would not apply to fixed-odds betting terminals from 6 December. However, the exclusions to general betting duty that are provided by the Betting and Gaming Duties Act 1981 could be amended only by primary legislation, which is what we are doing in the clause. On that basis, I hope that hon. Members will accept the amendment and the clause.

Paul Goodman: It is certainly a pleasure to see you back in the Chair, Mr. O’ Hara. I have to confess that I did a double take when I arrived in the Committee this morning and saw these red boxes flying around. I thought that the Government had greatly enlarged their ministerial team and that my hon. Friends and I would have to work even harder than we already are.
We have no quarrel with the amendment. This is the first amendment in the Committee where the Government have had to correct a drafting error in the Bill. I have not led for my party in debates on any of the Bill’s provisions before, but I recognise that this often happens in legislation. The quality of a Bill can often be judged by the number of such amendments that are tabled, so my hon. Friends and I shall be watching Ministers closely. We have no intention of opposing the amendment. If we did, we would make bookmakers liable for general betting duty when the measure in the clause is trying to separate betting duty from VAT.
We have no problem with the amendment, but if you, Mr. O’Hara, want me to refer to the clause at this point, I could certainly do so.

Edward O'Hara: As the debate is going, I do not think it is necessary to group the clause stand part debate with this one. We shall have a separate clause stand part debate.

Colin Breed: Some of us at this end of the room are struggling to hear. I do not know whether that is because people have quieter voices, but we can only just about hear. I do not know whether we have the microphone system on, but it is difficult to hear at this end. I suspect that it is impossible at the far end of the room.
I often receive letters from constituents—perhaps other hon. Members do too—complaining that they get doubled taxed. They pay tax in their working lives and then they tend to get taxed on all sorts of things after they have retired. They may not be sympathetic to the idea of letting the gambling industry off from double taxation. It is a sensible amendment and we have no difficulty in accepting it.

Rob Marris: I would like a slightly greater explanation from the Financial Secretary as I am not sure that I followed it. I thought that the amendment was designed to protect betting agencies or companies that are below the VAT threshold, but the VAT threshold is well below the 2.5 per cent. levy referred to in clause 10, which we have not yet come to. I may have misunderstood the amendment, but my understanding is that, if it goes through, someone running a betting operation below the VAT threshold will pay only 2.5 per cent. tax. If that is the case, it is far too low.

John Healey: Levying VAT, rather than general gaming duty, has two consequences. First, those small bookmakers who are not registered for VAT will have to register. We estimate that there will be around 200 of those. There are approximately 500 to 800 small bookmakers’ premises that belong to bookmakers who fall below the VAT threshold. They will be affected by clause 9 if we do not amend it, because they will not be able to levy VAT and will therefore have to charge the general betting duty, which is not our intention. They would, in effect, be penalised. While the general betting duty is levied at a rate of 15 per cent., the effective rate of VAT is around 12 per cent.

Amendment agreed to.

Question proposed, That the clause, as amended, stand part of the Bill.

Paul Goodman: As the Minister said in view of the amendment, the Government are attempting, as a result of the European Court judgment—the Financial Secretary did not refer to that—to separate out general betting duties and VAT. This is clearly something that has to be done in the light of the judgment. Unless some point is raised in this debate that would make us want to look at this clause again, we have no intention of opposing it.

John Healey: I welcome the intention of the hon. Member for Wycombe (Mr. Goodman) not to oppose this clause. I hope that the Committee will allow it to stand part of the Bill.

Question put and agreed to.

Clause 9, as amended, ordered to stand part ofthe Bill.

Clause 10

Rates of gaming duty

Question proposed, That the clause stand part ofthe Bill.

John Healey: We move on here to gaming duty and gaming duty bands. Clause 10 will increase the gaming duty bands in line with inflation for accounting periods starting on, or after, 1 April 2006. Increasing the value of the duty bands in line with inflation ensures that the real value of the thresholds above which the casino operator is liable to pay the higher rate of tax are maintained.
In looking at the decisions on gaming duty bands, there has been a question on the taxation of remote gaming. As we confirmed in the Budget, we are not looking to make announcements on the taxation of remote gaming until Budget 2007 so that the tax system can reflect detailed regulations for the sector. They are currently being developed by the Gambling Commission and are planned to be ready by the autumn.
The industry acknowledges the international nature of the remote gaming industry and recognises that it raises difficult issues for taxation. Nevertheless, the Government will continue the work with the industry over the coming months to consider the shape and rate of a valid tax regime for remote gaming. It is not an easy issue. There are many factors influencing the decision by remote gaming operators about where to locate. It is not clear that the rate of remote gaming duty will be the decisive factor. There may not be a tax solution to the aspiration of bringing remote gaming operators onshore into the United Kingdom and therefore under UK jurisdiction for social regulation purposes.
The decision to delay an announcement resulting from the Budget 2006 on the remote gaming system and bands has been warmly welcomed by the Remote Gambling Association. Officials and I met members of the Remote Gambling Association before the Budget and shall continue meeting them to discuss the implications of this issue. Clause 10 therefore revalorises the existing duty bandings. That is in accordance with the industry expectation and has been the practice of the Government in recent years. I commend the clause to the Committee.

Paul Goodman: It was useful for the Financial Secretary to say what he said about remote gaming duty. It is clearly a complex issue. It seems reasonable to raise the threshold in line with inflation. We have no further points to make.

Colin Breed: We largely agree with that. The Gambling Commission has serious work to do. We hope that there will be proposals in next year’s Budget, but we recognise the complexity of such matters. In the meantime, the proposal is sensible and we support it.

Question put and agreed to.

Clause 10 ordered to stand part of the Bill.

Clause 11

Definition of “gaming machine”

Question proposed, That the clause stand part ofthe Bill.

John Healey: The clause is about the definition of gaming machines. It amends the scope of legislation so that all machines capable of being used for gaming are subject to amusement machine licence duty. It will remove non-gaming machines, such as pinball and video machines, from the scope of the AMLD.
The clause defines a gaming machine by reference to section 23 of the Value Added Tax Act 1994. That section will be amended by clause 16, which we will consider shortly. With stated exemptions, a gaming machine will be defined as a machine designed or adapted for use by individuals to gamble, whether or not it can also be used for other purposes.
The clause ensures that any machine classified as a gaming machine under the Gambling Act 2005 and the VAT Act will pay AMLD from 1 August. Fixed-odd betting terminals, known as FOBTs, and so-called section 16 and 21 machines are included. Those machines are not currently liable to AMLD because they use a remotely sited random number generator. The current definition of a gaming machine, which we update under the Bill, relies on the outcome of the game being generated by means of the machine itself.
The changes in the clause will come into effect on1 August. They will bring the definition of gaming machines more in line with social regulation, technological developments and current industry practice. We have delayed their implementation to give both traders and Her Majesty’s Revenue and Customs time to adjust their systems and to help to ensure smooth transition to the new regime. As set out in the regulatory impact assessment, the compliance-cost effects are minimal. I commend the clause to the Committee.

Paul Goodman: I must confess that I have not during my researches found a machine that would enable me to ask the Financial Secretary whether it is a gaming machine or a non-gaming machine. Given my failure, I have no further issues to raise.

Colin Breed: The provision is clearly technical to keep up with the technology of gaming and amusement machines. We accept the Financial Secretary’s explanation and are happy to support the clause.

Question put and agreed to.

Clause 11 ordered to stand part of the Bill.

Clause 12

Classes of machine and rates of duty

Question proposed, That the clause stand part ofthe Bill.

John Healey: To some extent, the clause is a companion of clause 11. It will amend existing excise legislation to align amusement machine licence duty categories with the categories under the Gambling Act 2005, as we announced in the pre-Budget report. In addition, it will set the new duty rates. As I said in respect of clause 11, changes will take effect from1 August 2006 to give both traders and Her Majesty’s Revenue and Customs the time that they need to adjust their systems and ensure that, from both sides, the transition to the new regime will be as smooth as possible.
When we announced in the pre-Budget report that we would align the AMLD regime with the Gambling Act, it was generally agreed that the intention was desirable as a simplification measure. It will give operators a greater consistency between the tax and the social regulatory regimes. In general, the new duty rates on gaming machines reflect a revalorisation in line with inflation, following a freeze in last year’s Budget and a freeze in the Budget 2003.
To ensure what we believe is a more fair and equitable tax treatment for machines, the clause will introduce a new £5,000 annual rate for the unlimited stake, unlimited jackpot machines to be located in the one regional casino in future. It will introduce a £2,500 annual rate for other high-value casino jackpot machines. From the end of October last year, those machines saw their stake and prize limits double from £1 and £2,000 to £2 and £4,000.
A new rate of £1,780 will be introduced for jackpot machines with a maximum prize of £250. That reflects the inclusion in that category of some jackpot machines that offer the relatively low stake of just 10p. We decided not to wait for the implementation of the Gambling Act before the change. That is essentially because changes in the machine market mean that the old system of rates and categories is increasingly outdated. On that basis, I commend the clause to the Committee.

Paul Goodman: The Minister will know that the British Amusement Catering Trade Association welcomed the abolition of amusement machine licence duty on non-gaming amusement machines. However, it said that it was disappointed and concerned at a range of other AMLD increases, particularly in relation to the treatment of B4 machines that will now include 5p and 10p club machines whose duty will increase from £665 to £1,780 and £1,415 to £1,780 respectively. If they look at the clause, members of the Committee will find that I am referring to the bottom entry in the fifth column.
The association said that the change was an enormous hike and that it would cripple community and political clubs. I stress “political” because, who knows, that may include Labour clubs. The association said that such clubs often rely on the revenue from gaming machines for their existence, and it urges the Treasury to reconsider the rates. I look forward to what the Financial Secretary has to say about that.

Colin Breed: To some extent, we do not have any qualms with the clause only in the sense that we worry about 2p machines and those that provide only a £5 prize. I wondered why amusement and gaming people bothered about them, but I found out why on a recent ferry crossing. Early in the morning, I discovered that vast numbers of schoolchildren were whacking their money or somebody else’s—perhaps it was their lunch money—into those low-value machines. They do not provide much of a prize, but I suspect that they enable people to commence on the road to higher stakes.
I do not have any qualms about how the Government wish to regulate or tax such machines. They are used, probably perfectly satisfactorily, in clubs and similar places. I have some difficulty accepting that they should be used in more public areas such as ferries, but I am happy to support the clause.

Stewart Hosie: I seek a point of clarification from the Financial Secretary on the difference between categories B1 and A. The 12-month licence fee for category B1 machines—machines accepting a £2 stake for a £4,000 maximum prize—is £2,500. Category A machines, as he described them, accept unlimited stakes for effectively unlimited prizes, yet the 12-month licence costs only twice as much. If the prize from such machines is £50,000, £100,000 or whatever, is not £5,000 for a 12-month licence on the low side? I am trying to find out the Government’s thinking on the matter.

John Healey: The British Amusement Catering Trade Association, which the hon. Member for Wycombe quoted, is an important trade body. It represents the fragmented and diverse industry that uses amusement machines and therefore has an interest in amusement machine licence duty.
Officials and I have had regular discussions both during and after the formal consultation that we launched a couple of years ago on the future of AMLD. We went over BACTA’s arguments in detail. We went over the complexities of the industry and the categories and, in the end, we came to the judgment that the package we are offering in clause 12 is a fair balance given the competing factors at stake.
The hon. Gentleman mentioned the situation that political, community and sports clubs might be faced with regarding category B machines. That seemed to be the emphasis of the BACTA view that he told the Committee about. Three main categories of machine tend to be operated in registered clubs: 5p jackpot machines, 10p jackpot machines and higher-stake jackpot machines. We have tried hard to work with BACTA to reassure the industry that the approximately 4,000 5p machines that are located in such clubs—including some political clubs—and about which he was particularly concerned will not be liable for AMLD at £1,965 from 1 August. Rather, they will be liable for the £735 a year rate, as was always intended.
The new rates reflect the mix of machines in the new categories. The presence of about 6,000 10p jackpot machines in category B4, although that is fewer than the number of higher-stake club machines, is reflected in its lower rate than that of B3. That is the judgment and the overall package that we have come to. We have tried to keep the differentials in place where justified and to make rate changes reflect the development of machines and their distribution in the industry. I shall take BACTA’s representations through the hon. Member for Wycombe as early representations for the 2007 Budget. We will inevitably have to take decisions at that point about the rates of amusement machine licence duty.

Brooks Newmark: I should like clarification, because I was not clear about how the Financial Secretary was responding in respect of the 5p club machines. I understood that my hon. Friend the Member for Wycombe was saying that the duty on 5p machines—those in the community, political and working men’s clubs—will increase from £665 to £1,780, which is an almost 200 per cent. increase. Is that still going through, or have I misunderstood the rate increase for those machines?
I raise this issue because, as we all know, following the smoking ban, working men’s clubs and political and community clubs feel that they will find business difficult. This measure seems to be another nail in the coffin of such small community clubs.

John Healey: I said in my opening remarks that we are generally revalorising the bands and rates of amusement machine licence duty and we are conscious, as the hon. Gentleman said, that the prospect of the smoking ban creates a degree of uncertainty for the trading future. That is part of the overall judgment that we have come to.
On the hon. Gentleman’s specific point, I just said that the 4,000 or so 5p jackpot machines in clubs are intended to be, and will be, liable to the duty rate at £735 a year. That is our intention and that is what will happen, despite BACTA’s fears. I hope that the assurances that we have been able to give BACTA directly will give it the reassurance that it seeks—and I am grateful for the opportunity that the hon. Member for Wycombe has given me to put another assurance on the record.
I did not catch where the hon. Member for Dundee, East (Stewart Hosie) got his information from; I am not sure whether it was sourced from the Daily Mail, which takes a close interest in this field. There has been a certain amount of misunderstanding about the new £5,000 per annum rate that we are proposing for unlimited stakes and prizes machines, which will be in the new regional casinos once they are up and running. The hon. Gentleman asked for the rationale behind our setting that rate. We set it because we think that that is a fair rate of duty to be paid on the expected profit from such machines.
Experience overseas and the assessment work done by the Department for Culture, Media and Sport in considering the social regulation implications suggests that such machines could deliver an annual average profit of around £50,000, which means a duty-to-profit ratio of around £5,000:£50,000, or 10 per cent. That is comparable with the rate that applies in the other categories.
I hope that that was a useful explanation of the essential assessment and rationale behind the judgment of this as a new rate for a new category of gaming machine in this country, once the new regional casinos are introduced.

John Hemming: I thank the Financial Secretary for his response, which makes it clear that the objective is some form of equity in respect of a proportion of the return on the machinery. However, it also refers back to the social questions considered by the DCMS in respect of the licensing regime. Have the social issues for unlimited return gaming machines, which tend to attract people into depending on them and becoming addicted to that process, not been taken into account at all in determining the rate?

John Healey: The purpose of social regulation and the new Gambling Act is precisely to put in place the sort of controls regarded as appropriate for the development of the industry in future. The hon. Gentleman knows that such matters have been exhaustively debated in Parliament over the past couple of years. The purpose of the tax system is to ensure that we can get for the taxpayer and the public purse a reasonable, fair rate of tax on the profits that will be made from these activities. That is the purpose of the tax decisions that we have made and set out in the clause. The concerns about the social impact of new casinos and new forms of gambling are properly matters for social regulation and for the Department for Culture, Media and Sport. They are not properly an object or a purpose of the taxation system set out in the clause.

Question put and agreed to.

Clause 12 ordered to stand part of the Bill.

Clause 16

Gaming machines

Question proposed, That the clause stand part ofthe Bill.

John Healey: I have explained the purpose of the clause, referring to it in my remarks on clause 9. Its material effect is to align section 23 of the Value Added Tax Act 1994 with schedule 9 to that Act and therefore give full legal effect to a situation that has been in place administratively since 6 December.
The clause also allows us to amend the meaning of “games of chance” by Treasury order. We will do that later this year to ensure that both section 23 and schedule 9 take account of the definition of a “game of chance” that is contained in the Gambling Act. We have further work to do both with the industry and internally on pinning down that definition. That is why we propose to do it by Treasury order later this year, rather than now. I commend the clause to the Committee.

Mark Francois: May I also welcome you to the Chair, Mr. O’Hara? I look forward to serving under your beneficent guidance and that of your fellow Chairmen as we plough our way through the Bill over the next few weeks.
I also take this opportunity to welcome the Economic Secretary to our proceedings, and to congratulate him on his early promotion to the Government Front Bench. Someone has clearly smiled upon him and I think we all know who it was.
We have moved on to part 2 of the Bill, which deals with the VAT regime. When VAT was introduced in the United Kingdom back in 1973 it was apparently billed as a simple tax that would be easy to understand and to administer. In the next few hours, I suspect that the Committee might disagree with that original assertion. 
The clause deals with VAT and gaming machines. It represents a relatively gentle introduction to this part of the Bill and is relatively non-controversial. The Financial Secretary helpfully wrote to members of the Committee on 8 May, outlining the Government’s rationale behind the clause, which seeks, in essence, to update the definition of gaming machines for VAT purposes and the related definition of a “game of chance”. Anyone embarking on a political career might have their own definition of that.
I have one question to put to the Minister at this juncture. The final full paragraph of the Financial Secretary’s letter mentions that the updated definition of a “game of chance” is intended to comply with the definition in the Gambling Act. In itself, that seems to be a sensible provision. However, the letter also refers to a nuance concerning the fact that the Gambling Act does not apply in Northern Ireland. As the Financial Secretary said, confirmation is awaited that this will not cause any problems in using the definition in tax law. Before we allow the clause to stand part of the Bill, will the Minister expand a little on that point? Will he explain, at least roughly, when the Government expect that work to be complete? When do they expect that confirmation to be forthcoming so that the order can be issued.

Colin Breed: I believe that this measure is a useful clarification. Much of the work will be done in the next year or so, before the next Budget. We look forward to the complexities of that. In the meantime, the proposal is sensible to ensure that the definitions and so on are comparable.

John Healey: The hon. Member for Rayleigh(Mr. Francois) describes this provision as a gentle introduction to the VAT section of the Finance Bill. It was not designed as such; it was designed for the fairly narrow purpose of dealing with the definition of a “game of chance”. The simple answer to his direct question is that the Gambling Act does not apply to Northern Ireland, which has its own legislation in that area, although tax legislation does. We propose to draw heavily on the definition of a “game of chance” in the Gambling Act. We have more work to do before we can confirm that, particularly checking with the Northern Ireland Office whether or not there is any inconsistency or potential problem that we have not yet foreseen.
In such circumstances, rushing to confirm the definition when we do not need to at this point does not seem sensible. We will do that by Treasury order later this year. Essentially, we need to complete some technical work in order to do so with a certainty and confidence that means we are much less likely to have to return to the Committee and to the House to put right any technical deficiencies that we could have avoided. That is the purpose of the timetabling in those stages. I hope that that gives the hon. Gentleman the reassurance that he seeks.

Question put and agreed to.

Clause 16 ordered to stand part of the Bill.

Clause 17

Buildings and land

Question proposed, That the clause stand part ofthe Bill.

Mark Francois: I take the opportunity to welcome the Paymaster General to our debate on this part of the Bill.
In essence clause 17 is enabling, designed to permit the redrafting of schedule 10 of the Value Added Tax Act 1994, which deals specifically with the taxation of buildings and land. As the explanatory notes to clause 17 of the Bill point out:
“The VAT option to tax land and buildings legislation in Schedule 10 to the VAT Act 1994 is one of the most complex parts of the VAT legislation”.
The eyes of the hon. Member for Wolverhampton, South-West (Rob Marris) are positively lighting up as he reaches for the explanatory notes. I can see that he is not about to disappoint us.
The chief reason for this degree of complexity has been the piecemeal addition to schedule 10 since its introduction, chiefly by means of secondary legislation usually designed to add anti-avoidance measures to the original schedule. For instance, as just a small sample of the changes over the past 12 years or so, we have seen the Value Added Tax (Buildings and Land) Order 1994, which was the first attempt to tackle lease-back and similar anti-avoidance schemes. Then, as a further example, the Value Added Tax (Buildings and Land) Order 1999 closed a perceived loophole in the earlier anti-avoidance provisions. The Value Added Tax (Buildings and Land) Order 2004 aimed to head off further avoidance schemes used by partly exempt businesses, which the Treasury perceived to be another loophole.
The accumulation of secondary legislation has made the amended schedule 10 increasingly difficult to interpret in practice, to a point where HMRC’s partial regulatory impact assessment, which was released to accompany that proposed rewrite, admitted with admirable frankness,
“Adding layer upon layer of anti-avoidance provisions on to legislation that also has to deal with the complexities of English and Scottish land law has led to complaints about its complexity and virtual incomprehensibility.”
Indeed, the introduction of the consultation document provided advice that should perhaps inform the whole of our proceedings, with the recommendation that
“taxpayers would benefit from tax law which is clearer and easier to understand, and HMRC would benefit from being able to explain the law more easily”.
Finding any member of the Committee who would contend with that would be difficult.
There appears to be a broad consensus about the need for schedule 10 to be rewritten. The consultation document, which was issued in December 2005, laid out the general lines along which this would be undertaken. Moreover, the Paymaster General helpfully wrote to members of the Committee on5 May, providing copies of the draft Treasury order that would in effect rewrite the schedule. Members of the Committee should have had the opportunity at least to glance at that, although there has not been an opportunity to consult the professional bodies, because that draft order has only just emerged.
In particular, I note that the draft order is now designed to come into force on 1 October 2006. We have a timetable for implementation.
Rob Marrisrose—

Mark Francois: I will gladly give way to the hon. Gentleman. I do not know why it has taken him so long to rise.

Rob Marris: As the hon. Gentleman knows, I like to be measured and brief in my comments. I am grateful to him for giving way.
The hon. Gentleman said that this rewritten schedule 10 had come rather late, on 5 May. It is my understanding that, as he has mentioned, that is a second draft following the December 2005 draft, and therefore it appears to me that there has been quite a bit of consultation—4 months’ worth.

Mark Francois: For the avoidance of doubt, I was not trying to be critical of the Treasury. It undertook what I actually think in this instance was quite a good consultation—I will make a few remarks about the consultation process shortly. I was not in any way trying to have a pop at Government Ministers; I was simply making the point that we now have the draft order but because it has only just come out we have not had as much time as we would have liked to scrutinise it in detail. However, I am not knocking the fact that it is based on an original consultation which came out in December—and which I think was well conducted. I hope the hon. Gentleman will appreciate that nuance.

Rob Marris: Is the hon. Gentleman revealing to the Committee that he has not read this draft order rewriting schedule 10?

Mark Francois: No, he is not, because he has read it. However, if there were any problem, I am sure I could rely on the hon. Gentleman to help.
In essence, the schedule is being rewritten in three areas: first, by outlining the effect of an option to tax and the exclusions to those options; secondly, by including the revised and now consolidated anti-avoidance provisions; and thirdly, by outlining the mechanics of the administration of the options themselves, including their territorial scope, timing, revocation, notification and the operation of so-called permission options. The process also involves the repeal of certain aspects of the old schedule 10 which have effectively become time-expired, and which are therefore no longer needed. Therefore, it is fair to say that in this instance the Government have repealed some outdated legislation, and we should give them some credit for that.
Therefore, so far so good, but there are still some general questions that arise about the proposed rewrite, and I should like to go through them in turn with the Minister. First, why does this have to be done by order, instead of being written into primary legislation, which is what schedule 10 itself is? As an Institute of Indirect Taxation briefing note pointed out:
“We think it would be more appropriate for amendment to primary legislation to be made by primary legislation, not secondary legislation. In the case of buildings and land, as the draft legislation has already been exposed for comment it is unclear why it cannot be included in the Finance Bill, rather than including the best part of a page of enabling legislation, which will presumably have no use once the proposed Treasury order has been approved by the House of Commons.”
The Institute of Chartered Accountants has also expressed reservations about this process. It, too, has argued that such changes should have been brought about through primary legislation rather than by means of statutory instrument.

Brooks Newmark: I was interested to read that the august institution, the Chartered Institute of Taxation, also commented. It said:
“We doubt whether the suggested changes will have any impact on lay persons, so the only people to benefit are likely to be advisers.”
That is a concern, because it is important that whatever changes are made are sufficiently clear, so that lay people can understand the proposed changes.

Mark Francois: I thank my hon. Friend for that point. As I will discuss, the law has been particularly complex in this area, and that has been a particular challenge—for instance, for small businesses. Therefore, my hon. Friend makes a valid point.
I think it is fair to say that what has been produced is simpler and less complex than what it replaced, and the Government should be given credit on that point. However, my specific question to the Minister is: why were they not in a position to do that by primary legislation? Why did the Government decide to do this by secondary, rather than primary, legislation? Was it because the revised schedule was not available in time, perhaps because the consultation—which I think was well conducted—only finished at the end of February 2006 so parliamentary draftsmen could not come up with a proposed new schedule in time to include it in the Finance Bill when it was published on 7 April? I would accept that point, but I would then ask another question: could the Government not subsequently have tabled a new schedule to the Bill in Committee and put the proposal into primary legislation, rather than relying on an enabling clause and a subsequent statutory instrument? Is there a technical reason why the Government have done that? It would be helpful to have an answer from the Paymaster General when she replies to the debate.

Stephen Hesford: I should like to raise the hon. Gentleman’s quotations from the two institutions with the VAT and duties sub-committee of the Law Society, which said:
“The Law Society welcome the proposal to rewrite schedule 10 VATA 1994 in more accessible language and look forward to reviewing the draft statutory instrument to give effect to this proposal.”

Mark Francois: I thank the hon. Gentleman for his intervention. Far be it from me to provoke a dispute between the professional institutions, not least the Law Society, as I am always wary when dealing with m’learned friends.
Several bodies expressed reservations about why the Government acted as they did. The hon. Gentleman quoted the fact that the Law Society was interested in seeing the draft order; that did not necessarily mean that it endorsed that way of doing it, just that the Law Society was looking forward to seeing it and will now have a chance to do so. I look forward to the Paymaster General’s response to that point.
Secondly, in respect of the consultation exercise, the Government consulted a number of interested bodies about the proposals, including, but not limited to, the British Property Federation, the British Retail Consortium, the Chartered Institute of Taxation, the Confederation of British Industry and the Law Society. The explanatory notes to the Bill state:
“A consultation document containing draft legislation, which might replace schedule 10 in its current form, was published in December 2005. This was very positively received by business.”
If that is the case, can the Minister give us some idea of the types of responses that were received? Will she say specifically whether any additional changes were made to the draft order as a result of that consultation? In other words, will she give us examples of what was published in December having been amended to prove that the Government were listening to those whom it took the trouble to consult?
Thirdly, there is the effect of the changes on small businesses. Under the heading “Sectors and Groups affected” the regulatory impact assessment states that the changes will affect
“virtually all businesses registered for VAT in their capacity of landlord, tenant or owner-occupier.”
However, under the associated heading “Small Firms Impact Test”, the regulatory impact assessment states:
“It has not been possible to consult with small businesses before the public consultation stage, but small businesses often complained about the cost of professional advice incurred in relation to VAT land and property transactions. We will be taking soundings from small businesses alongside the formal consultation.”
Can the Minister give the Committee some idea what comprised the “soundings” of the small business community? How were they conducted and which organisations were involved? Can she show that some changes took place in the recently published new draft schedule as a result, particularly in relation to how it might affect small businesses?
This is an especially technical area of VAT law and there appears to be a consensus on the need to rewrite schedule 10. The Opposition do not challenge that and the Government have responded to it, initiating what appeared to be a good consultation exercise. They then published the draft order, which they hope will be in force in October.
To summarise, before we allow this enabling clause to stand part of the Bill, will the Minister tell us, first, why the Government did not use primary legislation? Secondly, will she provide examples of the draft order being informed by the consultation exercise and of changes having taken place since December? Thirdly, how was the small business community consulted and what changes have been initiated as a result?
I look forward to hearing contributions from other members of the Committee and I will listen to the Paymaster General’s no doubt thoughtful reply.

Rob Marris: I merely want to congratulate the Paymaster General and her team on producing the draft Treasury order in time for this debate. The Treasury is good at that. Too often when we are considering legislation there is a lack of draft orders but not when they are Treasury proposals.
I have one small question for the Paymaster General. Am I right in looking at page 18 of the draft Treasury order that there is a schedule to the schedule? Because if that is the case—namely schedule 1 to schedule 10—that is a new one on me in legislation.

Julia Goldsworthy: I will extend the general introduction to the VAT section of this Bill and merely say that of course we welcome the simplification of one of the most complex parts of the existing VAT legislation and would echo concerns that have already been expressed.
If a consultation took place in December 2005 and was generally positively received I do not understand why it is not possible to get this primary legislation in the Bill. That is all I have to say.

Dawn Primarolo: I beg your pardon for being slow to stand up, Mr. O’Hara. I was lulled into a false sense of security in believing that lots of other Members would want to speak, although I was perplexed as to why they would want to. Just to remind the Committee, this is a rewrite of current legislation. It always worries me—this has happened before in finance Bills—that when legislation, particularly VAT legislation, is rewritten in the tax law rewrite style, it has often led to a misunderstanding, particularly from Conservative Members, that somehow new legislation is being introduced. I remember having to explain to a Conservative Member, who used to be a Minister and who is now in opposition, that all that had happened was that the legislation that he introduced had been rewritten into the tax law rewrite style and if he was shocked about the contents of the legislation I wondered how he had not noticed it when he introduced it in the first place.
Perhaps I could answer the questions posed by the hon. Member for Rayleigh (Mr. Francois) succinctly, in the spirit of the rewrite. The reason why this is a schedule by order is that the original legislation in 1989, drawn up under the Conservatives, and consolidated in 1994 by a Conservative Administration, provided new legislation for it to be done this way and a rewrite follows; otherwise it cannot be just a rewrite.
To answer my hon. Friend the Member for Wolverhampton, South-West, no it is not a schedule to a schedule; it is an order schedule, or a schedule to an order. I always fear when my hon. Friend gets up because I know that he studies all the papers assiduously and I fear that he will find something that I have missed—he often does. But I can reassure him on that point at least.
In terms of the responses and the changes to the two drafts, I am happy to take the general areas but I would say to the hon. Member for Rayleigh that, of the responses received in the consultation, The CBI welcomed the new format and considered it an improvement on the existing legislation, much easier to understand, and the British Property Federation welcomes the Government’s decision to rewrite schedule 10, believing that this is an “excellent initiative”. The Institute of Chartered Accountants welcomes the rewriting of complex legislation to put it into plainer English. I will come in a moment to the differences, the points that were raised in the consultation and how I propose to deal with those in the order, having listened to the consultation, once I have given way.

Brooks Newmark: As always I remain concerned when Ministers use selective quotes. I have a comment from the British Property Federation in response to this consultation:
“Notwithstanding our support for the government’s decision to rewrite legislation”—
the Paymaster General was absolutely right to point that out, but the comment continues—
“we do believe there are a number of improvements that might be made to the draft legislation.”
I would encourage the Paymaster General to talk to the British Property Federation to understand what those improvements might be.

Dawn Primarolo: I was just coming to those points. I am aware of them, and they will be reflected in the draft. We have returned to the point raised by the hon. Member for Rayleigh concerning the nature of the consultation and how things will change. I shall just briefly go through the small number of proposed changes. The original order was less positively received and I hope that in responding to these points, we have now dealt with that. Discussions are still going on, and the order will be dealt with by the affirmative procedure, so there will be ample time to ensure that the draft reflects people’s concerns.
I want to give hon. Members an absolute assurance: our purpose is to rewrite the legislation. The Department and my officials will do everything possible in that rewrite remit to ensure that we respond to those points. They basically fall into three broad areas.
Mr. Newmarkrose—

Dawn Primarolo: Perhaps the hon. Gentleman would allow me to tell him about the three broad areas that the consultation wanted us to consider and how I am prepared to deal with it. I will be happy to give way to him afterwards.
The first area concerns the anti-avoidance test. The hon. Member for Rayleigh touched on the complexities involved. I agree with what he said about passing piece after piece of anti-avoidance legislation; we often do not have a choice about that. The issue in question, which has been discussed in Committee before, concerned the definition of
“wholly or mainly for eligible purposes”.
That was to be changed to
“wholly or almost wholly for eligible purposes”.
For those who really want to study the VAT regulations, the original intention was to ensure that the provision reflected more closely the application of HMRC’s understanding of the meaning of 80 per cent. or more.
I propose a change to the draft legislation that will enable HMRC to define by tertiary legislation—a discussion is going on with those concerned about the rule—the 80 per cent. figure with a discretion to accept a lower amount; the point being that those in certain circumstances should be reassured that a lower figure could be taken.
The next major issue concerned the condition relating to non-residential buildings intended for use as dwellings and residential accommodation. That can be treated as outside the option to tax. We really do not need to discuss the option to tax, nor would we want to; it is complex. The current provisions cause problems because the supplier of the building, who has to decide whether to charge tax, faces uncertainty in knowing their customer’s intention. That has always been a problem.
A great deal of clarification was sought as to whether the proposed wording was insufficient to give that certainty. Therefore, I have decided to introduce a certification requirement with clear rules on timing and content of the certificates, so that the customer will give a certificate to the seller, indicating how he or she intends to use the building. That removes that uncertainty for the seller. If further work needs to be done to ensure that it works properly, there are always the guidance notes. I stress again that we want to get it right.
Another issue that emerged in the consultation is that when businesses opt to tax, they have to check whether the land is exempt. However, they have to go all the way back to 1 August 1989, which is quite a long way. I was asked whether that was fair or reasonable. Because it is a fixed date, I cannot change it; to do so would involve retrospection, and I am sure that Opposition Members would have something to say about that. None the less, such a period of look-back is difficult, so I propose limiting it to 10 years. If the hon. Member for Rayleigh wonders where that figure comes from, my officials advise me that it is the period of adjustment under the capital goods scheme. It works well for that scheme, and it seems sensible to adopt it. Those were the major points from the consultation.
In answer to the hon. Member for Braintree(Mr. Newmark), he can see that certification could help small businesses enormously, because if there was any question the Department would go to the buyer, not the seller. I promised that I would give way to the hon. Gentleman; if I have not answered his questions, I can do so now.

Brooks Newmark: I am always encouraged when the Paymaster General tries to answer my questions. Unfortunately, I have to go back a bit. She said that the purpose was to rewrite schedule 10. As I see from the explanatory notes, and to reiterate a point made by my hon. Friend the Member for Rayleigh, the purpose of rewriting the schedule is to make its language clearer and easier to use. Once again, I reflect on the comments of the Chartered Institute of Taxation and its concern about the impact that the changes will have on lay persons. I want an assurance from the right hon. Lady that the changes will be in a format that is clearer and easier to use.

Dawn Primarolo: I assure the hon. Gentleman that it is being done. I am struggling with the idea that the bedtime reading of citizens of the United Kingdom and Northern Ireland might be schedule 10 to the 1994 Act on land and property options. Who knows? I would prefer something slightly lighter at that timeof day.
The hon. Gentleman is in danger of over-egging the pudding. I doubt whether the Chartered Institute of Taxation would put it that strongly. It knows full well who will use it. The tax law rewrite was established by a previous Government, it has proceeded under the present Government, and it is widely welcomed as delivering precisely the point that the hon. Gentleman now makes. He may remember that rather a lot of legislation is affected by the rewrite.

Mark Francois: My hon. Friend the Member for Braintree said that the British Property Federation still had some concerns. In fairness, the Paymaster General has given some thorough answers, for which I am grateful. However, the federation has one outstanding question on the definition of beneficial ownership of land and buildings. As the right hon. Lady will know, beneficial ownership is not always the same as the physical ownership of the land itself. It is a technical point, which follows from a High Court case Abbey National plc v. Commissioners of Customs and Excise in 2005. We have Treasury questions in the Chamber in a few minutes, so perhaps it would be sensible if, rather than reading all of this into the record, I were to write to the right hon. Lady so that she could look into the matter.
Secondly, because the order will, rightly, be subject to affirmative resolution, and because it will come into effect on 1 October, I take it that we will pass that affirmative resolution before the House rises for the summer recess and that, no doubt, the Paymaster General and I will be involved in debating it. Can she confirm that?

Dawn Primarolo: On the question of further observations from the British Property Federation, I am happy for the hon. Gentleman to write to me. I will ensure that my officials chase up any issues that need to be pursued. As to the date on which the order will be debated, it will not, alas, be fixed for the convenience of my diary or that of the hon. Gentleman, but will be set by negotiations through the usual channels. Clearly, the sooner we discuss the order the better. However, I also want to be sure to leave ample time for all those who have been consulted to express their views and to digest the way in which the Department is responding to them. I hope that we can proceed within a reasonable time. Having said that, I trust that I have answered all the questions put by hon. Members.

Question put and agreed to.

Clause 17 ordered to stand part of the Bill.

Clause 18

Value of imported works of art etc: auctioneer’s commission

Mark Francois: I beg to move amendment No. 2, in page 20, line 32 [Vol 1], at end add
‘but not before 1st September 2006.'.
This clause is designed to implement a recent decision by the European Court of Justice regarding the treatment by the United Kingdom of auctioneers’ commissions relating to goods auctioned while held in a temporary import regime in the UK. In essence, the decision means that such commissions must in future be taxed at the standard rate of VAT, 17.5 per cent., rather than at the reduced rate of only 5 per cent. Our amendment is designed to ensure that the change occurs no earlier than 1 September, so as to allow the market sufficient time to adjust in an orderly fashion.
The background to the matter is that since 1999 the UK has charged VAT at 5 per cent. on the sale of works of art that are held in a temporary import regime, and also on the auctioneers’ commissions that are associated with them. However, the European Commission challenged that procedure under the auspices of the so-called second simplification directive—something with which I am sure that the hon. Member for Wolverhampton, South-West is very familiar—arguing that the auctioneer’s commission should be standard rated at 17.5 per cent. For the record, the UK Government challenged that interpretation, and the Commission referred the matter to the European Court of Justice for determination in 2002. In February 2005, Advocate-General Kokott of the ECJ delivered her opinion in favour of the Commission, and that was upheld by the Court in the spring of this year, necessitating the change that we are discussing.
As the explanatory notes to the Bill point out:
“Buyers premium, a commission charged to the purchaser of goods at auction, will now attract VAT at the standard rate where the goods are within a temporary importation regime when sold and are subsequently finally imported into the European Union.”
Unfortunately, some elements of the press have reported that as meaning that the standard rate of VAT will be levied on the imported objects themselves as well as on the buyer’s premium. My understanding, following consultation with representatives of the British art market, is that that is erroneous; the judgment applies only to the buyer’s premium. The confusion arose partly because there was some ambiguity in the judgment, which allowed room for doubt.
My interpretation is that buyers on the London market will continue to pay 5 per cent. VAT on the hammer price of objects held within the temporary import regime, and will pay 17.5 per cent. only on the auctioneer’s commission. That can vary, but it is usually between 12 per cent. and 20 per cent. of the hammer price of an object. It would provide welcome reassurance both for potential buyers and for practitioners in the market if the Paymaster General were to make it clear beyond peradventure that that is correct.
We then have an issue about the time at which the measure should come into effect, which takes us to the heart of amendment No. 2. The changes are envisaged to take place via an order under clause 18(4) which states that that order should come into effect
“on such day as the Treasury may by order made by statutory instrument appoint.”
I understand that the implementation date has been a matter of some discussion between the market, its representatives, HMRC officials and in particular the British Art Market Federation which speaks principally for the industry on this issue. Among its constituent bodies are the Antiquities Dealers Association, Bonhams, Christie’s, the Association of Art and Antique Dealers, the Society of Fine Art Auctioneers and Valuers, the Society of London Art Dealers and Sotheby’s.
The BAMF was keen for me to stress this afternoon the constructive dialogue that it has had with the Paymaster General’s officials on this matter and that they are grateful for the time and trouble to which those officials have gone. They wanted me to place that on the record, which I am happy to do.
The key point, however, is that the market is seasonal, so it is important that the change should not be brought in mid-season. That could have an unsettling effect, as Anthony Browne, the chairman of the BAMF, explained in a letter to me. He wrote:
“The changes require primary legislation and we have discussed the changes with HMRC. The implementation date for the change is a crucial factor for the market, since the judgement requires changes to computer systems, contracts and catalogue rubric. The EC expects rapid compliance with the judgement and we have been told that the latest date for implementation is 1st September 2006.”
Mr. Browne continued:
“This date seems appropriate if, as we have been told, we cannot delay until 1st January 2007. An introduction date between the two would be likely to cause more confusion than it would be worth, since it would involve changing the rules during one of the busiest times of the year for the art market.”
That seems to be a reasonable point and I am happy therefore to put it to the Paymaster General. On that basis, is she prepared to accept our amendment? It would not obstruct the court, but merely allow time for the UK market to adjust. Alternatively, if she is not minded to accept the amendment, which specifies 1 September 2006, will she explain her rationale and perhaps offer an alternative implementation date, if that is what she has in mind.

Rob Marris: I congratulate the hon. Member for Rayleigh on speaking well and cogently. I like it when, while discussing the Finance Bill, we get occasional flashes of politics. Earlier this morning, we debated Government amendment No. 1 on VAT and now we are debating amendment No. 2. I may stand to be corrected, but it strikes me from the numbering that the most important thing that the Conservative party have locked on to is the date of implementation of those VAT changes on imported works of art. I recognise that the London art market is important, but it does not play huge around the country. It is not a huge issue in Wolverhampton, South-West, yet it appears to be their No. 1 priority.

Philip Dunne: Will the hon. Gentleman give way?

Rob Marris: No, I will not because I shall be sitting down soon.
That appears to be the Conservative party’s No. 1 priority. That is absolutely extraordinary.

Julia Goldsworthy: That is a difficult one to follow. Obviously, the substance of the clause is sensible— compliance with the European Court of Justice ruling—however, there is a great degree of sense to the amendment. It reflects the seasonality of the art market and would allow time for people and the market to adjust before implementation. We will support the amendment.
Debate adjourned.—[Mr. Heppel.]

Adjourned accordingly at nineteen minutes past Ten o’clock till this day at fifteen minutes to Two o’clock.